NISM Certifications Equity and Currency Derivatives Syllabus

Equity and Currency Derivatives syllabus: all 5 chapters

Expand any chapter to see its topics and sub-topics.

1. 1

   Foundations of Derivatives

   3 topics

   • Concept and Types of Derivatives
     • Forwards, futures, options, and swaps
     • OTC versus exchange-traded derivatives
     • Underlying assets and contract specifications
   • Participants in Derivatives Markets
     • Hedgers, speculators, and arbitrageurs
     • Market makers
   • Economic Role of Derivatives
     • Price discovery and risk transfer
     • Leverage and its implications
2. 2

   Futures Contracts

   3 topics

   • Futures Pricing and Cost of Carry
     • Spot-futures parity
     • Contango and backwardation
     • Basis and convergence
   • Index and Stock Futures
     • Contract specifications and lot sizes
     • Mark-to-market settlement
     • Rollover of positions
   • Hedging and Trading Strategies with Futures
     • Long and short hedge
     • Beta hedging of portfolios
     • Calendar spreads
3. 3

   Options Contracts

   3 topics

   • Option Fundamentals
     • Call and put options
     • In-the-money, at-the-money, out-of-the-money
     • Intrinsic value and time value
   • Option Pricing and Greeks
     • Factors affecting premium
     • Delta, gamma, theta, vega, rho
     • Implied volatility
   • Option Trading Strategies
     • Covered call and protective put
     • Spreads, straddles, and strangles
     • Payoff diagrams
4. 4

   Currency Derivatives

   3 topics

   • Exchange Rate Mechanics
     • Spot and forward rates
     • Quotation conventions and arbitrage
     • Interest rate parity
   • Currency Futures and Options
     • USD-INR and cross-currency contracts
     • Contract specifications and settlement
     • Hedging foreign exchange exposure
   • Regulatory Framework for Currency Derivatives
     • RBI and SEBI roles
     • Position limits and eligibility
5. 5

   Clearing, Settlement and Risk Management

   3 topics

   • Margining System
     • SPAN and exposure margins
     • Initial and mark-to-market margins
     • Extreme loss margin
   • Clearing Corporation and Settlement
     • Novation and counterparty guarantee
     • Daily and final settlement
   • Trading Member Compliance
     • Position limits and reporting
     • Codes of conduct

NISM Certifications Equity and Currency Derivatives flashcards — 51 questions with answers

1. What is a derivative?

   A financial instrument whose value is derived from the value of an underlying asset (such as a stock, index, commodity, or currency).

2. Name the four main types of derivative contracts.

   Forwards, Futures, Options, and Swaps.

3. How does a forward contract differ from a futures contract?

   A forward is a customized, OTC, privately negotiated contract with counterparty (credit) risk; a futures contract is standardized, exchange-traded, and guaranteed by a clearing corporation with daily mark-to-market margining.

4. Who are the three main types of participants in derivatives markets?

   Hedgers (reduce/transfer risk), Speculators (take on risk to profit from price movements), and Arbitrageurs (profit from price discrepancies across markets).

5. What is the role of an arbitrageur in derivatives markets?

   To simultaneously buy and sell related assets in different markets to lock in risk-free profit from price discrepancies, which helps keep prices aligned.

6. State three key economic functions (roles) of derivatives.

   Price discovery, risk transfer/management (hedging), and improving market efficiency and liquidity.

7. What is the cost-of-carry model for futures pricing?

   Fair futures price = Spot price + Cost of carry, i.e. F = S × e^(r×t) (or F = S(1 + r×t)) where r is the cost of financing and t is time to expiry; income like dividends reduces the carry.

8. Using cost of carry with dividends, what is the fair price of a stock future?

   F = (S − PV of dividends) × e^(r×t), i.e. expected dividends are subtracted because holding the future foregoes dividend income.

9. What is the 'basis' in futures markets?

   Basis = Spot price − Futures price. It tends to converge to zero as the contract approaches expiry.

10. What does 'contango' mean in a futures market?

    A market condition where the futures price is higher than the spot price (normal market with positive cost of carry).

11. What does 'backwardation' (inverted market) mean?

    A market condition where the futures price is lower than the spot price.

12. What is the difference between an index future and a stock future?

    An index future has a market index (e.g., Nifty) as the underlying and is cash-settled; a stock future has an individual stock as the underlying and (in India) is settled by physical delivery.

13. How are index futures settled in India?

    Index futures are cash-settled, as the underlying index cannot be physically delivered.

14. How can an investor hedge a long equity portfolio using index futures?

    By selling (going short) index futures, so that losses in the portfolio from a market fall are offset by gains on the short futures position.

15. What is the formula for the number of index futures contracts needed to hedge a portfolio?

    Number of contracts = (Portfolio value × Portfolio beta) ÷ (Index futures price × Lot size).

16. What is beta in the context of equity hedging with futures?

    Beta measures a portfolio's or stock's sensitivity to movements in the market index; it is used to adjust the hedge ratio when hedging with index futures.

17. What is a 'calendar spread' strategy in futures?

    Simultaneously buying and selling futures of the same underlying with different expiry months to profit from changes in the basis/spread between the two contracts.

18. What is the difference between a call option and a put option?

    A call option gives the holder the right to BUY the underlying at the strike price; a put option gives the holder the right to SELL the underlying at the strike price.

19. What is the difference between an American option and a European option?

    An American option can be exercised any time up to expiry; a European option can be exercised only on the expiry date.

20. Define the strike (exercise) price of an option.

    The predetermined price at which the option holder can buy (call) or sell (put) the underlying asset.

NISM Certifications Equity and Currency Derivatives FAQ